SEATTLE—The good news for producers of synthetic rubber is that feedstock supply currently isn't a big issue. But the bad news is the reason for that is demand down the value chain, particularly in automotive, is disappointing.
That's the view of Bill Hyde, executive director of olefins and elastomers at IHS Markit, who addressed the topic during an interview at the recent International Institute of Synthetic Rubber Producers Annual General Meeting in Seattle.
"If you look at China, which is the largest producer of passenger car vehicles in the world, year-on-year from 2017-18, they were down, and 2019 hasn't started off strong," Hyde said. "So that's a pretty significant impact on synthetic rubber demand, so (SR producers) have operating rates which have lengthened their feedstock supply and kept prices a lot lower than we thought they would be."
When looking at the fundamental economic factors in the U.S., which remains the largest tire and second largest car market globally, first-quarter GDP growth of 3.2 percent was stronger than expected. But, he said, IHS analysts still project the economy to rise about 2.9 percent during 2019, a bit slower than last year.
"It's an easing of the stimulus we got from the tax cuts," Hyde said. "It's more reasonable to say that GDP growth is returning to the trend line than to say it is weakening."
While some may think the decline in automotive can be tied to the ongoing trade wars, the IHS analyst doesn't think that's the case. He said the trade issues are significant, but sees them as depressing the U.S. GDP growth only by about 0.5 percent.
The U.S.-China trade relationship obviously is the most important one, but other regions—including Europe and India—also are showing nationalistic tendencies. "It's a troubling rise of inefficiency in the global trade pattern," Hyde said. "It's understandable, but it's inefficient."
The China factor
China historically hasn't exported much synthetic rubber, but the nation has been a significant SR importer. In the past four to five years, though, China has cut imports significantly as it has added SR capacity and become more self-sufficient. That means the companies that were selling into China—many of those in Northeast Asia—now are looking for alternative markets for their SR production, according to Hyde.
"The most obvious place for them to go with it is the U.S.," he said, "because we have a large rubber market and we're a net importer of synthetic rubber, we're a net importer of butadiene and we're a net importer of tires. We're basically a net importer along the entire value chain."
This trend impacts the volume side of the business more immediately than it will pricing because most SR in the U.S. and Europe is sold on a feedstock formula basis. "When synthetic rubber prices are lower, especially in Europe but also in Asia, not only are they uncompetitive in the export markets, but they struggle sometimes even in the domestic markets," Hyde said.
And a large U.S. SR producer and consumer such as Goodyear has to balance different cost factors when making sourcing decisions. "They've got tire plants across the globe, but their rubber has to be competitive delivered to the tire plants with external alternative supplies," he said. "They can't produce as much as they need. They've gone back and forth over the years, weighing 'Do we run our rubber assets at full rates and capture the chain margin and force the tire plants to take whatever our rubber costs are? Or do we force our rubber division to compete at the tire plant gate with external suppliers?' "
Besides dealing with feedstock volatility prices over the past decade, the next major factor impacting SR producers has been overcapacity. Hyde estimated worldwide operating rates of 60-70 percent, with a lot, but not all, of that caused by capacity additions in recent years in China, particularly in polybutadiene.
"The world just hasn't absorbed all of that additional capacity," he said. "If you draw a circle around China, they don't care. They're just importing less.
"They're making more ethylene, which means they're making more butadiene, which means they've got more reliable feedstock for domestic SR producers. They're making more tires—not as many more as they thought they would—but they are making more."
Hyde said this all plays into a Chinese market that is more self-sufficient, which China is happy about, but has had a domino effect for the rest of the world.
The IHS analyst also said the solution SBR market hasn't taken off as many thought it would, for a variety of reasons. One is that tire labeling hasn't developed as it was expected to. In the U.S., he said, there isn't an independent validation of tire performance, while in Europe labeling is mandatory but not audited, leading some companies to allegedly fake tests.
"That's the old standard saying, 'People will do what you inspect, not what you expect,' " Hyde said. "The hope from the S-SBR perspective was that consumers would get better visibility into the actual rolling resistance of the tires they were buying and would be incentivized to buy more fuel efficient tires."
This has failed on two fronts, he said. One is that labeling isn't there in a meaningful way so the data isn't available. The other is that gasoline has stayed inexpensive enough so consumers aren't willing to pay more for a set of fuel efficient tires when they're not paying that much for gas.
Still, there continues to be new SR capacity being brought on stream, even in S-SBR. In that SR sector, Hyde said there are several different technology levels and depending on which tier a producer is serving, they're either sold out or having to sell the rubber into the emulsion SBR market at lower prices.
"Tire companies tell me if they haven't designed in the performance from the state-of-the-art S-SBR, then it's of no value to them," Hyde said. "The first generation S-SBR is largely being sold into the E-SBR markets at emulsion prices. The newer S-SBR seems like it's pretty sold out. At least that's what the producers say. And they're saying it not just in annual reports, but they're also saying it with their pocketbooks by adding capacity."
In other SR sectors, there is some polybutadiene capacity being added but not much; there is very little new E-SBR capacity coming on stream; and there is some butyl rubber capacity planned, but it's mostly in China.
NR poses problems
Another ongoing issue impacting SR producers is the continued oversupply and lower prices available for natural rubber.
"The NR markets have been weak really since the second half of 2011," Hyde said. "The problem they have is they don't have any kind of control on the supply side. More than 70 percent of NR is produced in Southeast Asia, and of that more than 80 percent is grown by small, subsistence-level farmers."
He recalls at a conference a few years ago, a representative of the India NR industry said they have roughly 10,000 natural rubber farmers in the nation, with the average plot size a hectare and a half. Hyde said he lives in a suburb in Texas so his yard is a bit larger than average, but the size of the typical NR farmer's plot is just two to three times the size of his back yard.
So when the price of natural rubber goes down, these small farmers have to sell more rubber because they need to keep their income at a certain level to be able to feed their families. "It's in their own interest, but it's counter to the overall interest of the market, from the producer side anyways," he said.
Because of these factors, efforts by the largest NR-producing nations such as Thailand and Indonesia to cut NR production and exports have ended in failure. And even if these larger nations were to take some NR off the market, smaller NR-producing countries such as Vietnam, Cambodia and the Ivory Coast would be more than happy to increase their sales to offset any shortfall.
Hyde said the negative impact of the natural rubber situation on SR producers is likely to last at least the next three years.